Recession fears spook market, advisers

Aug 7, 2011 @ 12:01 am

By Andrew Osterland

If they weren't already concerned about the economy, last week's precipitous stock market decline led many financial advisers to conclude that the nation is headed into another recession.

An InvestmentNews survey of advisers conducted Thursday and Friday found that about 41% of 1,604 respondents said that they think that a downturn is coming.

“I'm not sure whether or not we'll go into recession, but we see a slowing economy,” said Peter Lang, whose Strata Wealth Management unit of HighTower Advisors LLC manages $400 million in assets. His firm has been reducing risk in client portfolios “for a while” because of economic concerns.

Mr. Lang said that while he still favors large-cap dividend-paying stocks, his firm is reducing exposure to more economically sensitive small caps.

The S&P 500 lost 7.2% last week, with most of that decline coming on Thursday, the worst day for stocks since the dark days of the 2008 market crash. In the past two weeks, the S&P 500 dropped 10.8%.

“The economic data has shown how anemic this recovery is, and the debt deal could be one more nail in the coffin,” said Mark Lushini, chief investment strategist for Janney Montgomery Scott LLC, which manages $54 billion in assets. He is now more concerned that belt-tightening in Washington could hurt an already weak economy.

“If they raise taxes it could choke off consumer spending, and if they make big cuts in expenditures, the reduced government spending will hurt, too. I think we'll work our way out of this difficult period, but the probability of another recession is increasing,” Mr. Lushini said.

Similar concerns were raised by Jason Thomas, chief investment officer at Aspiriant LLC.

“The economy is on the edge as it is, and this deal will involve a contraction of fiscal policy,” said Mr. Thomas, whose firm manages $7.4 billion in assets.

Perhaps the only good news last week came on Friday, when the government reported 117,000 jobs were created in July, exceeding economists' expectation of 75,000.

Although optimistic in the long term, Mr. Thomas is “very cautious in the near term.” He said that he and his colleagues are considering whether the fall in equity prices is a buying opportunity or a signal to reduce risks in client portfolios further. “I think we're likely to make our portfolios more conservative in the next couple of weeks,” he said.

Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney LLC, remains bullish on both the economy and equity markets.

“We don't think we're headed for another recession and we view this sell-off as a correction within the equity bull cycle,” said Mr. Applegate, who nevertheless continues to overweight emerging-markets equities and debt because of their superior public finance situations and stronger economic fundamentals.


The InvestmentNews survey found advisers to be optimistic about markets as well. More than 65% of respondents believe the S&P 500 — which closed Friday at 1,199.38 — will end the year above 1,200.

While the U.S. government debt and deficit issues were clearly a contributor to the sell-off last week, Ric Edelman of Edelman Financial Group, which manages $7.2 billion in assets, isn't worrying much about what happens in Washington.

“This was political theater and had nothing to do with economics or investment strategy,” he said.

Like many other advisers, Mr. Edelman is still bullish on stocks and the prospects for companies in a low-interest-rate environment.

“Corporate profits and interest rates are what really matter. Investors will eventually realize that companies are doing fine, and that they're worrying about the wrong things,” Mr. Edelman said.

His advice: Steer clear of gold, long-term debt and municipal bonds.

Mr. Thomas disagrees on the issue of municipal bonds, noting that the nominal yields on munis now exceed those on comparable Treasuries, indicating that they are significantly undervalued.

“Munis represent the best risk-adjusted opportunity in the market,” he said.

And how are advisers calming their nervous clients?

“We're reminding clients why they own what they own,” said Mr. Lushini. “In some cases we may do some portfolio triage and remove some investments that aren't consistent with a client's risk budget. But investors should not abandon high-quality, global, dividend-paying franchises.”

Mr. Lushini sees the dive in stock prices as an opportunity to buy more of some of those franchises. The common stock of AAA-rated Johnson & Johnson, for example, is now yielding 3.7% — a higher return than the company's 10-year bonds currently pay.

Email Andrew Osterland at


What do you think?

View comments

Recommended for you

Upcoming Event

May 30


Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video


Behind the scenes of InvestmentNews' Best Places to Work

Benefits and vacation policies are important for hiring top talent, but giving employees a sense of ownership in decision-making is among the most important qualities, editor Fred Gabriel says.

Latest news & opinion

Why we must create a more diverse and sustainable financial planning profession

CEO explains how, why a firm should commit to conscious inclusion.

Pope Francis wants financial advisers to work like fiduciaries

Vatican bulletin admonishes advisers who act against the best interests of their clients.

Wells Fargo sees slowdown in advisers exiting this year

The 2016 banking scandal and public relations fiasco had alienated some of the firm's advisers.

States trying to save DOL fiduciary rule appeal rejection of effort to intervene

California, New York, Oregon ask for rehearing by full 5th Circuit Court of Appeals.

Employees at best places to work focus on the person — and the fun

Employees at best places to work firms focus on the person and fun.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print